The Examiners: There’s No Easy Solution on Student Loans

Should the bankruptcy code be amended to make it easier for borrowers to seek forgiveness of student loan debt through a bankruptcy filing?

This is a question that cannot be answered easily. Without a doubt, there is a financing crisis in higher education. College tuition has increased at least 250% in the last 25 years. However, over a comparable period, real wages for college graduates have risen by less than 20%. Students continue to invest in their college educations as enrollment has generally grown, and they are increasingly borrowing to do so. The total student loan balance has exceeded $1 trillion.

The government has various income-related repayment and forgiveness programs in place that make student loans a manageable form of debt for most Americans. Income-based repayment plans for federal loans allow borrowers to pay a percentage of their income, with the balance to be forgiven after 25 years. President Barack Obama’s new executive order would extend this program to a larger group of borrowers and would allow the balance to be forgiven after 20 years. The government also provides public service loan forgiveness for borrowers who make a certain number of timely payments while working for a government entity or 501(c)(3) employer. These programs, however, only cover federal loans, not private loans, which some students turn to in order to cover the cost of attending college when it’s above what they are able to borrow through the government.

A recent study by McKinsey & Co. found that about one in three graduates of four-year colleges felt that their education didn’t prepare them for employment. This same study found that about half of recent U.S. graduates were unable to find work in the field they had hoped to enter—including four in 10 of those who graduated from the country’s top schools.

Without question, there is a public policy benefit to making sure that an entire generation of young Americans isn’t burdened with debt they won’t be able to repay. On the other hand, the government needs to be careful not to create a moral hazard in which people secure loans without ever having an intention to repay them. Moreover, whenever the government decides to forgive an entire segment of debt—like student loans—there is a cost. That cost needs be weighed against the costs for other programs, like Social Security, Medicare and Medicaid. There needs to be a thoughtful balancing of all these concerns in determining where our government should devote limited resources. That is why, even though forgiving student loans seems like an easy solution to a difficult problem, the real answer is considerably more complicated.

Jay Goffman is the global leader of Skadden, Arps, Slate, Meagher & Flom’s corporate restructuring practice. He is based in New York.